Net Neutrality in 2010?

In September 2005, the FCC published a policy statement regarding rules for the Internet. There were four "Internet freedoms" approved at this time:

• Consumers are entitled to access the lawful Internet content of their choice
• Consumers are entitled to run applications and use services of their choice, subject to the needs of law enforcement
• Consumers are entitled to connect their choice of legal devices that do not harm the network
• Consumers are entitled to competition among network providers, application and service providers, and content providers.

Fast forward to October 22, 2009. The FCC released their draft proposal to make the principles binding with the addition of two new items:

• A provider of broadband Internet access service must treat lawful content, applications, and services in a nondiscriminatory manner
• A provider of broadband Internet access service must disclose such information concerning network management and other practices as is reasonably required for users and content, application, and service providers to enjoy the protections specified in this rulemaking

A lively debate has ensued between Internet companies like Google, Amazon, Facebook and the VC community (pro net neutrality) versus the telco and cable providers (anti-net neutrality). What's interesting about this debate is how both sides will say the same thing but from completely different view points.

The Open Internet Coalition writes on their web site: "The Open Internet Coalition seeks to ensure that the transmission of Internet traffic remains open, accessible and fast, and does not favor one particular brand or type of content over another."

AT&T sent an email to their employees asking for support against net neutrality and closes with this statement: "Thank you in advance for taking action that supports our customers, our company, and our country's commitment to ensure that every American has access to broadband."

Both sound pretty reasonable, right? Without going into all the reasons why, I have to side with the pro net neutrality camp. Net neutrality boils down to making sure that the Internet gatekeepers, that is, all the Internet Service Providers, telcos, and cable providers are unable to restrict access to content or degrade performance in any way. I tend to agree with Google's “Internet Evangelist” Vint Cerf, who wrote that, “The Internet was designed to maximize user choice and competition, and we’ve all benefited immensely as a result…today the FCC took an important step in protecting that environment and ensuring that the Internet remains a platform for innovation, economic growth and free expression.”

We don't need toll booths on the road to the Internet. With the steps that FCC Chairman Julius Genachowski has taken, we may see 2010 as the year that an open Internet becomes the rule of law.

A Milestone for Mobile Advertising

In yet another indication of growth in the mobile phone industry, and smartphones in particular, Google announced the acquisition of AdMob on November 11, 2009. The $750 million price tag sends a clear signal that Google intends to be just as serious about search and advertising in the mobile space as they are on PC. Google has always been the likely suitor for AdMob so the acquisition represents more of a milestone for mobile advertising than a surprise.

Mobile and search advertising is still in its infancy. According to the Kelsey Group, search advertising was just 24% of the $160 million U.S. mobile advertising market last year. However, they project it will grow to 73% of a $3.1 billion mobile ad market in 2013. That's great news for Google if their foray into mobile search proves successful. Smartphone growth and usage patterns play a huge part of the business. Smartphones are expected to grown at roughly 5x the rate of feature phones (IDC, 2009) between now and 2013. In addition, users of smartphones tend to browse the Internet and do social networking for much longer periods of time than the average mobile phone user. The combination provides a solid business model for mobile advertising and Google clearly intends to have their fair share of the market.

Has Mobile VoIP Hit a Tipping Point?

Voice over IP (VoIP) has long been a problem area for telecom carriers. Since VoIP allows voice calls to be routed over the Internet, it bypasses the carrier's PSTN network and any revenue they might otherwise receive. Carriers took a first step by supporting landline VoIP service to homes, small businesses and enterprises offering all the cool features made possible with a packet-based voice solution (e.g., combined high-speed Internet access, TV and voice service, click to call from your TV, PC-based management of voice mails and call preferences). AT&T's U-verse Voice and Verizon's FiOS are two examples of VoIP offerings.

Mobile VoIP extends IP-based voice service to mobile phones. And here's where the conflict for carriers gets interesting. Wireless revenues are growing while landline voice revenues are shrinking. As a result, carriers have not been too eager to offer mobile VoIP service that could cannibalize a lucrative and growing wireless market. In a related development, the cable companies and large Internet services like Google and EBay started a discussion around "net neutrality" in 2005 after the FCC phased out rules requiring traditional telecom carriers to share their broadband networks with competitors. That same year, the FCC approved four informal net neutrality principles, but broadband provider Comcast, in a lawsuit, has challenged the FCC's authority to enforce those principles. Just last week, the FCC decided to open the rule making process around net neutrality, inviting industry comments around a new net neutrality proposal (Reuters, Oct 22). Under the FCC proposal, wireless broadband services would be included in the net neutrality rules. The idea being that such rules would preserve the innovation and openness that has allowed the Internet to be successful.

With the threat of FCC action in the background, it's been interesting to watch the flurry of announcements coming from carriers recently:

Oct 6: Verizon announces strategic partnership with Google. Although not in the press release, the plan is for Verizon to support Google Voice, Googles VoIP app, on the new Verizon Android devices.

Oct 6: AT&T extends VoIP to 3G network on iPhone. AT&T has provided VoIP support on iPhone but only on Wi-Fi networks. Other devices have had VoIP support on AT&T's 2G, 3G and Wi-Fi networks for some time. This announcement opens VoIP access to millions of iPhone users.

Oct 12: Sprint offers VoIP solution to wholesale customers. Allows VoIP providers to leverage Sprint's IP network for delivery of enterprise-class VoIP services.



Businesses certainly see the benefit of mobile VoIP solutions, likely from a cost-reduction standpoint. Below is a chart from IDC's report "The Importance of Security in Corporate Mobility Solutions" (February, 2009). In a survey of CIOs, mobile VoIP ranks 4th as a key reason for investment in mobility solutions.






Around the world we're starting to see other carriers open their networks to mobile VoIP. Telefonica's O2 Germany announced support of VoIP on mobile phones August 17 in a move that puts pressure on resistant local leader Deutsche Telekom.



With continued pressure from VoIP players and device vendors, as well a cost-conscious public, we can expect that more mobile operators will open their networks to VoIP. The deployment of 4G networks such as WiMAX and LTE, which hold the promise of greater bandwidth and richer services, will only increase the attractiveness of such services, making continued mobile VoIP restrictions a challenging long-term strategy.

SI Consolidation Continues

Consolidation in the system integrator market seems to be on a roll again. On September 21, Dell announced the acquisition of Perot Systems. One week later, Xerox buys ACS. Of course, these deals have been in the works for quite sometime but it does point to a trend. Established companies seeking to expand beyond their core products are buying up services firms as a means to do so. That's a reasonable choice given the growth and margins in this business.

Let's take a quick look at who's still out there. The top 10 SIs by revenue are IBM Global Services, Fujitsu, Accenture, HP (EDS), CSC, Capgemini, Lockheed Martin, ACS (soon to be Xerox), Tata Consultancy Services and Wipro. Combined, these companies represent over $180B in annual revenue and 1.4 million employees. You can take a few of these companies off the acquisition list right away. Nobody is buying IBM, Fujitsu, HP or Lockheed. Tata and Wipro are based in India, are growing like a weed (30%+/yr) and have high ambitions themselves to continue that growth. Capgemini is based in France making a U.S. based acquisition unlikely. That leaves CSC with 2008 revenues of $16.7B and 92,000 employees. Sure there are hundreds of other local, niche SIs that are growing nicely, but this is a quick cut at the biggest targets remaining.

So here's my wild forecast for 2010: Continuing their string of large acquisitions, Oracle decides to enter the SI fray and acquires CSC. An SI arm within Oracle would complement nicely their enterprise software assets (databases, ERP, CRM, middleware, etc.) and help grow a new hardware business assuming the Sun Microsystems acquisition is successful. By the way, my second runner-up is CGI. But at a mere $3.7B in revenue and 26,000 employees it's likely too modest a start for Oracle these days.

Making Money with 4G: Lowering the Cost of the 1st Subscriber

I had the pleasure of writing the following entry with Bob Sellinger, a former telecom network architect and colleague from Sun Microsystems. Bob has worked in the telecom industry for many years and served as Director of Engineering and Marketing while at Alcatel-Lucent.

In the early days of telecom network design, break even points of a million subscribers were acceptable for most business cases. Higher costs could be justified by the large subscriber base that was being enabled. Not so today. Carriers want to establish national reach while being able to cost-effectively deploy networks in evolving markets that may have only 10–25,000 initial subscribers. Carriers also want the option of deploying new differentiated services (like CDNs) with modest incremental investments that leverage their large investments in new 4G access networks. While wireless growth in major metropolitan cities is slowing, emerging markets such as the BRIC countries (Brazil, Russia, India and China) are experiencing tremendous growth in wireless adoption. The challenge for carriers is to figure out how to cost-effectively deploy wireless networks in small, remote villages where the past economics of a large subscriber base no longer apply.

The trend to deploy networks on a more granular basis, combined with the convergence of wireline and wireless networks, is prompting NEPs to seek new ways to design their network elements. Without such change, they run the risk of designing a solution that costs too much, takes too long to develop, doesn't cost effectively evolve with new differentiated services, and does not scale well on the lower end.

One path forward for the carrier is to focus on lowering the cost of their 1st subscribers by using off-the shelf technologies to radically converge parts of new 4G networks. This emphasis on low-end scalability can be accomplished with new platform technologies that support the aggressive consolidation of all the discrete network elements that typically have been deployed on physically separate servers. New multi-core processors coupled with powerful virtualization technology can perform all of the functions, including packet processing, deployed at the network’s edge with the aggregate wireline speeds (10Gb) that 4G services expect. By using a single multi-core processor capable of both running simultaneously today’s de-facto operating environments—Solaris or Carrier-Grade Linux—and the lightweight run-time environments required for processing packets at wireline speeds, the 4G order of magnitude increase in access bandwidth can be achieved in a cost effective way.

For example, next-generation IP networks are being based on the IP Multimedia Subsystem (IMS) design. IMS consists of many elements such as the HSS, CSCF (-P, -I, -S), media gateways and more. Broadband 4G networks require additional elements such as Content Delivery Networks for video transmission and network controllers such as the LTE access controller or the WiMax ASN Gateway. If the carrier uses the right platform, all of this functionality could be combined on a single, multi-core processor capable of simultaneously executing all the operating environments these functions require, resulting in dramatic cost reductions. As network traffic increases, the carrier could deploy a similarly configured blade server versus having to replicate multiple network elements.

Using industry standard 4G-platform technologies such as multi-core processors, virtualization software and lightweight run-time environments, functionality could be cost-effectively consolidated at the edge of the network in nodes that competitively scale for small numbers of subscribers. Not only would this represent a cost breakthrough for building networks for emerging markets, it would facilitate the deployment of new 4G networks on a campus or community scale. Finally, it would also create the computing foundation in the core of new 4G access networks that new services could cost-effectively exploit - to the advantage of the NEP, the carrier, and the carrier's customers.

Nortel's Dismantlement: A Bow to Market Forces

It wasn't that long ago when over a dozen network equipment providers vied for a piece of the telecom infrastructure pie. For years, carriers steadily grew their voice networks, carving out profitable subscriber bases held captive to expensive rate plans. They built large, monolithic networks the NEPs sold at healthy profits. Nortel was a darling in the industry reaching a market cap of $250B at the peak of the market in 2000. Everyone in the telecom ecosystem was happy. So what happened that so dramatically impacted Nortel's future? Here's a few reasons: the Internet, de-regulation in the U.S., and Asian competition.

• The Internet changed everything. A communication network based on digital bits & bytes made long-distance calls irrelevant, enabled new, cool features and lowered the cost of network equipment through consolidation. New competitors offering VoIP service plans forced traditional carriers to respond with their own lower cost plans. Revenues from voice has been in decline ever since. This has placed tremendous cost pressure on carriers who in turn forced NEPs to lower the cost of their next-gen systems year over year often by double digits.
  
• The Federal Telecommunications Act of 1996 changed the landscape of the telecom industry significantly. It allowed any communications business to compete in any market against any other. And new competitors emerged. Most notably, cable providers joined the telecom market offering the "triple play" package of voice, TV and Internet access. Carriers responded by offering cable service. New entrants like Vonage and Skype offered unique all-you-can-eat voice plans leveraging VoIP technology. All of this activity created a fierce competitive environment, placing further downward pressure on cost and ultimately leading to a massive consolidation of U.S. carriers. Fewer carriers meant fewer network deals for NEPs. This trend spread around the world. It became clear that only the strong would survive.
  
• To get the attention of a western-based NEP, one need mention only one word: Huawei. The China NEP shocked the industry by developing high quality network equipment at a cost no other western-based NEP could approach. Initially focused on the China market, Huwaei quickly expanded into international markets with aggressive marketing and sales tactics. Revenues exploded from $2.7B US in 2002 to over $23B US in 2008, a 46% increase over 2007. International contracts now make up over 75% of Huawei's revenue. Other Asian NEPs such as ZTE and DaTang added to the market pressure. Unable to compete on price, the global NEPs responded by consolidating their operations, offering both breadth and depth. Alcatel-Lucent and Nokia-Siemens merged their operations. Motorola and Nortel saw their market share decline while unable to find a suitable dancing partner on their own.

Ericsson, the 800 lb gorilla in the GSM market, has been able to remain independent and now, pending anti-trust approval, will reap the benefits by acquiring Nortel's crown jewels at a bargain basement price. Nortel's rapidly declining but highly profitable CDMA signal processing unit will nearly double Ericsson's North American revenues and strengthens Ericsson's ability to serve the same wireless operators in the evolution to LTE. Nortel tried it's best to remain independent but in the end was unable to adjust to the market forces it once mastered.

Telecom Tops the BusinessWeek InfoTech 100

BusinessWeek's 2009 annual ranking of the best in high tech makes one thing clear: even in challenging global economic times, lots of companies are making money. In fact, an even closer examination shows that of all industries, the telecommunications space is one of the best places to be. Of the top 100 companies in the BusinessWeek InfoTech 100, 35 of them are either telecom service providers or communications equipment providers (categories: Tele and Comm). The next largest industry group is computer companies (category: Comp) with 24 of the top 100. And finally, I can't help but notice that three of the top smartphone manufacturers on the planet are in the Top 20: HTC (13), Research in Motion (14) and Apple (19). Nokia also made it on the list, ranking 48th overall.

But what's interesting about the combination of HTC, RIM and Apple? According to Strategy Analytics, these three companies garnered 48% of global handset profits in Q4 of 2008. That's a pretty amazing feat when you consider that from a market share perspective, the same three companies represent just 5% of the total number of devices shipped annually. The raw numbers on the BusinessWeek InfoTech 100 rankings tell part of the story as well. The revenue-to-profit ratios for HTC, RIM and Apple are 5.2, 5.8 and 6.7, respectively. Put another way, it takes 5 to 6 dollars of revenue to make a buck in profit. Compare that to number one on the list Amazon with a ratio of 29.3, Accenture's 14.1 or Acer's 39.7 and it becomes clear how the smarthphone companies are well-positioned to ride out, and even thrive during, a crushing global recession.

The Tax Man Visits the Mobile Phone

Have you heard the news? If you don't think you get taxed enough already, then you're going to love the latest proposal from the Internal Revenue Service. The Wall Street Journal reported that the IRS has proposed taxing the use of company-issued mobile phones as a “fringe benefit.” Here's the deal: employers would assign 25% of an employee's annual phone expense as a taxable benefit. Under that scenario, a worker in the 28% tax bracket, whose wireless device costs the company $2,500 a year, could see their tax bill increase by $175. Employees could avoid the tax if they could prove that they used their personal cellphones for non-business calls during work hours.

Full disclosure: I work for Research in Motion (RIMM) and they generously provide me with a fully paid, wonderfully capable BlackBerry smartphone. That said, this proposal irritates me for several reasons:

• It's none of the Government's business. The Government has no place intruding on what amounts to a small, but certainly appreciated, employee benefit. What's next? Company-purchased coffee, T-shirts and mugs based on the percent used during non-business hours?
• It's too cumbersome. Can you imagine a F500 company parsing every employee's phone bill in order to determine the percentage of business vs personal calls? If companies must track every call made home like “Hi Honey, I'll stop and pick up some milk,” then this will make Sarbanes-Oxley look positively effortless. As it turns out, there's been a law in place since 1989 that requires workers who use company-paid phones for personal calls to count the value of those calls and pay federal income tax accordingly. But neither businesses nor workers have paid much attention to it for the very reason that it's simply too burdensome to bother.
• It's not worth it. Has the IRS estimated the potential tax revenue from this proposal? At the dawn of the cellphone industry, wireless minutes were a precious commodity. Today is another story. The cost per minute has dropped increasingly with time, with most wireless plans containing judicious amounts of night and weekend free minutes. In light of the trillions of dollars being added to the national debt, it's hard to see this tax moving the needle.
• It's counter-productive. Employee's with phones attached to their hips are working 24x7. If the Government is going to tax personal calls made during business hours, should workers be given credits for making work-related calls during non-business hours? After all, they're not supposed to be working. A tax like this will only make employees think twice - or be bitter at best – about tending to business during the “off hours” time.

Bill Dalton, reporting on KansasCity.com, says “The question for the mobile phone industry, particularly companies like RIM, which sells its Blackberry primarily for business use, will see any drop off in sales if the IRS is effective in enforcing the rule.”

I don't see that happening. The smartphone has become an indispensable productivity tool for businesses. Demand will likely remain whether it's a company-provided benefit or not. Let's just hope common sense prevails at the IRS as they ponder how to raise tax revenue during this recession.